We reiterate our Neutral recommendation on MetLife Inc. (MET) based on robust growth in the U.S. and international businesses, improved underwriting results, higher premiums, strong book value growth and stable ratings. However, escalated expenses, stiff competition and higher-than-expected derivative losses are the downsides.
MetLife reported first quarter operating earnings per share of $1.37, ahead of both the Zacks Consensus Estimate of $1.30 and the year-ago quarter earnings of $1.23. Operating earnings escalated 11% year over year to $1.46 billion.
MetLife maintains a diversified business mix and is one of the strongest brands in the U.S., Mexico, Japan, Chile, Poland and Korea based on its customer-centric business model. Moreover, the company consistently realigns its business portfolio to cater to market demands.
MetLife is also regaining its competitive and operating strengths by aggressively divesting its banking operations.Over the past six months, MetLife agreed to sell MetLife Bank's deposit business to General Electric Co.’s (GE) financial services unit – GE Capital, warehouse finance business to EverBank Financial Corp. (EVER) and its reverse mortgage servicing portfolio to Nationstar Mortgage.
Moreover, MetLife has a strong risk-based capital position, ample liquidity and leading market position in its core group and individual insurance businesses. Going ahead, management projected return on equity growth of 12–14% by 2016, while excess capital is expected to augment to $6–7 billion by the end of 2012.
However, the current interest rate environment is affecting the spreads and MetLife’s risk-adjusted capitalization. Consequently, the annuity operations, sales in corporate benefit funding and investment income have moderated in the last few quarters and are expected to weaken in the upcoming quarters.
The adverse impacts of interest rate, currency fluctuation and credit spreads also resulted in pre-tax derivative losses of approximately $2.0 billion in the first quarter of 2012. Furthermore, an earnings reduction of about 20 cents per share is estimated this year, should the ten-year Treasury bond interest rate continue at 2.5% through 2012.
Although losses in net investment portfolio have moderated from the peak levels during 2008 and early part of 2009, these are expected to persistently trim profits over the near term until the markets gain buoyancy.
MetLife continues to be pressured by a rising trend in benefits and claims that puts additional strain on the expenses and bottom line. Consequently, total expenses increased 6.6% year over year in the first quarter of 2012. Meanwhile, MetLife expects to incur costs of $90–100 million in 2013 due to the shutdown of its forward residential mortgage business.
MetLife currently carries a Zacks #3 Rank (short-term Hold rating).
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