FX Headwinds, Lower Interest Rates Soften MetLife’s Q1 Earnings

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MetLife (NYSE:MET) announced its earnings for the first quarter of 2015 on Wednesday. MetLife reported a 10% year-over-year (y-o-y) increase in operating income of over $1.6 billion on a constant currency basis, benefiting from growth in business as well as improved underwriting performance during the first quarter. [1] Growth in sales across geographies, including the U.S., Latin America, Asia and EMEA (Europe, Middle-East and Africa) lifted MetLife’s results. However, as MetLife’s operations are spread across many international markets, it is susceptible to fluctuations in foreign currencies. As has been the case for the last couple of quarters, FX headwinds continued to hamper in the company’s profits in Q1, resulting in just 5% y-o-y growth in operating income on an adjusted basis.

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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FX Headwinds Weigh On Business Growth

MetLife experienced good sales growth in different product lines and also benefited from a stronger underwriting performance. In the U.S., where MetLife is the largest life insurance group with a market share of over 8% in terms of premiums earned, the company operates four different product lines. [2] Operating earnings in the Retail segment increased 3% y-o-y. Increased life and disability sales led to a 1% y-o-y increase in revenues to $3.2 billion from premiums and fees in the retail category. Fixed and variable annuity sales remained unchanged compared to the previous year, while the Group, Voluntary and Worksite benefits business saw better underwriting boost operating income.

Japan once again led the pack in Asia, posting a 32% y-o-y increase in sales of accident and health insurance products, driving a 4% y-o-y (on a constant currency basis) growth in total sales in Asia. Due to solid business growth and improved underwriting performance in various markets in Asia, operating income from the region increased by 8% y-o-y on a constant currency basis to $327 million. However, as the U.S. Dollar continued to strengthen against a host of international currencies, including the Japanese Yen, on a nominal basis the operating income actually declined by 2% y-o-y. [3]

Low Interest Rates Pressure Earnings

During the first quarter, net investment income of $5.0 billion was down 2% compared to the previous year despite some derivative net gains of $394 million (after tax and adjustments). MetLife’s net investment yields have continued to drop over the past few quarters. The yield on investments fell to 4.74% in Q1 2015 from 4.89% in Q1 2014. The yield on fixed maturity securities, which account for most of MetLife’s investments, dropped from 4.9% in June 2014 to 4.64% in Q1 2015. [4] This is a consequence of the persistent low interest rate environment. Going forward, the Federal Reserve is being cautious with respect to increasing interest rates. Accordingly, we expect a steady but gradual increase in investment yields.

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Notes:
  1. MetLife Announces First Quarter 2015 Results, Press Release, MetLife Investor Relations []
  2. NATIONAL ASSOCIATION OF INSURANCE COMMISSIONERS LIFE AND FRATERNAL INSURANCE INDUSTRY, 2015 []
  3. DOLLAR INDEX SPOT Exchange Rate, Bloomberg []
  4. Q1 2015 Quarterly Financial Supplement, MetLife Investor Relations []