MetLife, Inc.
/ (MET - NYSE) / $45.89Note: This report contains substantially new material. Subsequent reports will have changes highlighted
Reason for Report: 4Q17 Earnings Update
Prev. Ed.: 3Q17 Earnings Update: Dec 18, 2017
Brokers’ Recommendations: Positive; 53.8% (7 firms); Neutral: 46.2% (6); Negative: 0.0% (0) Prev. Ed.: 6; 3; 0
Brokers’ Target Price: $55.67 (↓$2.5 from the last edition; 9 firms) Brokers’ Avg. Expected Return: 21.3%
A Flash Update on 4Q17 earnings was done on Feb 13, 2018.
Portfolio Manager Executive Summary
MetLife, Inc. is a diversified life insurer providing term life, annuities and other retirement products as along with auto and homeowners insurance. In addition to these, MetLife has international operations and a reinsurance business.
Approximately 53.8% of the firms covering the stock provided positive ratings, while the remaining 46.2% assigned neutral ratings. None of the firms rendered the stock negative. Of the 13 firms covering the stock, nine provided target prices ranging from $50.00 (8.7% upside from current price) to $60.00 (30% upside from the current price).
Positive or equivalent outlook – 7/13 firms or 53.8% – The bullish firms are of the opinion that MetLife’s leading position in the life insurance industry offers an attractive platform for growth. A favorable risk-reward relationship also impels the firms to expect MetLife’s growth to be driven by expense controls, shift from the U.S. Variable Annuity (VA) product, return on equity (ROE) expansion and regulatory developments in the future.
According to these firms, MetLife’s above-average exposure to sustained low-interest rates and regulatory uncertainty are concerns for the near term. However, in the long run, the firms project a relatively positive outlook for the company. The firms expect growth in the Asian business as well as benefits from the ALICO and Provida acquisitions. Moreover, the firms believe that the divestment of non-core operations should bolster ROE expansion. These firms also predict mortality ratio and catastrophe loss to normalize in the future.
The firms with a bullish outlook also expect domestic business growth to be weak in the upcoming period owing to low interest rates, a pullback from the VA market and a soft economy. However, the international segment comprising EMEA and Asia are expected to perform better, owing to the addition of ALICO.
The firms positively view MetLife’s proposal to split U.S. retail operations into a separate entity.
Neutral or equivalent outlook – 6/13 firms or 46.2% – The cautious firms stated that MetLife trades at a discount to the peer group in spite of being a superior brand, thereby generating improved returns, diversifying its operations and having a scale advantage.
The neutral firms appreciate MetLife’s strong capital management policy and ROE as it is based on fundamental growth. Resumption of share repurchase should also boost results. The firms are also optimistic about MetLife’s diverse earning sources and capitalization level. The complete divestment of banking operations has amplified the company’s operational strength.
Further uncertain growth prospects in the life and annuity businesses along with underwriting and currency headwinds are some of the potential downsides identified by the firms.
Mar 29, 2018
Overview
Firms identified the following key factors when evaluating the investment merits of MetLife:
Key Positive Arguments / Key Negative Arguments· High brand recognition and leading position in life insurance industry.
· Economic growth, stable interest rates and rising stock market are expected to improve MetLife’s ROE and drive modest expansion in price/book value.
· Modest organic growth and balance sheet.
· Investors are becoming increasingly confident of management’s credibility and incremental returns, reflected by the latest dividend hike.
· Shift from capital-intensive products and disciplined expense management to improve operating leverage.
· The ALICO and Provida acquisitions to accelerate MetLife’s earnings and position in the emerging markets. / · Profitability and cash flow are sensitive to changes in interest rates and equity market fluctuations.
· High level of exposure to currency fluctuations from expanding international operations.
· Intense competition across business segments.
· Catastrophe losses impact earnings significantly.
MetLife Inc., based in New York, is a leading provider of insurance and financial services with operations throughout the United States and Latin America, Europe, and the Asia-Pacific regions. Through its domestic and international subsidiaries and affiliates, MetLife reaches more than 90 million customers worldwide and is the largest life insurer in the United States (based on life insurance in-force). The MetLife companies offer life insurance, annuities, auto and home insurance, retail banking and other financial services to individuals as well as group insurance, and retirement and savings products and services to corporations and other institutions.
MetLife is organized into six segments — U.S.; Asia; Latin America; Europe, the Middle East and Africa (“EMEA”); MetLife Holdings; and Brighthouse Financial. In addition, the Company reports certain of its results of operations in Corporate & Other.
MetLife’s fiscal year coincides with the calendar year. Its website is www.metlife.com.
Mar 29, 2018
Long-Term Growth
The firms believe that MetLife’s leading position in the life insurance industry provides an attractive platform for growth. The company has a dominant franchise in the group life, disability and dental markets and hence, should be a major beneficiary of an economic recovery.
The company also expects to improve its risk profile, and reallocate its product mix from capital-intensive products to protection products in order to generate steadier operating earnings, which in turn, will help it achieve its targeted ROE. The recent expansion into Myanmar and Vietnam supports the company’s strategy of growth from emerging markets.
MetLife has a significant competitive advantage, given its superior scale and strong financial position. Meanwhile, de-registering from a bank holding company status has not only liberated MetLife from stringent banking regulations but should also enhance its competitive advantage and help in healthy capital deployment. Additionally, divestment of operations that are not competitively and operationally advantageous should help MetLife hold a diminished risk profile and maintain a sturdy capital position. These factors will further help in retaining investors’ confidence in the stock and boost its market value.
Some bullish firms expect the company’s international business to be profitable, driven by strong organic growth in Asia and Latin America.
However, the sales and cash flow in the domestic spread-based products are expected to be strained due to low interest rates, while variable annuity flows are also anticipated to decline.
Overall, MetLife’s diversified business mix, broad distribution, and strong balance sheet will help it withstand further deterioration in macro trends better than most of its peers. This is also validated by management’s projection of incremental free cash generation, as a percentage of operating earnings, in the long run.
Mar 29, 2018
Target Price/Valuation
Rating DistributionPositive / 53.8%↓
Neutral / 46.2%↑
Negative / 0.0%
Avg. Target Price / $55.67↓
Digest High / $60.00↓
Digest Low / $50.00↓
No. of Analysts with Target Price/ Total / 9/13
Risks to the price target include further delay in the share repurchase program, low interest rates, regulatory issues in operating in the international markets, poor economic conditions, credit losses, hedging risk, weak equity markets, investment spread compression, adverse mortality/claim rates, unfavorable reactions of policyholders and exchange rate fluctuations.
Recent Events
On Mar 22, 2018, MetLife formed a strategic alliance with Ernst & Young LLP that will drive the creation and delivery of a cutting-edge workplace financial wellness solution. Launching in spring 2018, PlanSmart®Financial Wellness will focus on behavioral change, giving employees the tools, guidance and support they need to improve their financial wellbeing.
On Feb 13, 2018, MetLife, Inc. posted 4Q17 and 2017 earnings results. Operating earnings of $1.11 per share beat the Zacks Consensus Estimate by 0.91%. However, the bottom line increased 3% year over year.
Though performances at U.S., Asia and MetLife Holdings remained soft, strong performing EMEA and Latin America limited the downside.
For 2017, MetLife posted net income of $3.38 per share on $62.1 billion revenues. While the bottom line improved nearly six times, the topline rose 2.5% over the tally in 2016.
Financial Update
Variable investment income decreased to $140 million from $159 million in the year-ago quarter due to weaker alternative investments performance and lower prepayments.
Book value per share decreased 9.7% year over year to $53.57 per share as of Dec 31, 2017.
Adjusted tangible return on equity expanded 200 basis points to 10.6%.
Revenues
MetLife generated operating revenues of $15.8 billion, up 7.7% year over year on 3.5% higher premiums, 4.5% higher investment income and nearly, 8% increase in other revenues. Revenues missed the Zacks Consensus Estimate by 0.62%.
Segment Update
United States
Operating premiums, fees & other revenues increased 4% to $6 billion.
Asia
Operating premiums, fees & other revenues in Asia decreased 2% (up 3% on constant currency basis) to $2.1 billion.
Latin America
Operating premiums, fees & other revenues were $988 million, up 8% on reported and 5% on constant currency basis.
EMEA
Operating premiums, fees & other revenues were $651 million, up 5% on reported and 1% on constant currency basis.
MetLife Holdings
Operating premiums, fees & other revenues were $1.5 billion, down 11%, primarily due to Brighthouse separation-related impacts.
Margins
Total expenses increased 5.8% year over year to $14.9 billion.
Segment Update
United States
Adjusted earnings in this segment declined 3% year over year to $498 million, attributable to increasing certain RIS policy reserves.
Asia
Operating earnings of $310 million were down 12% year over year on both reported and constant currency basis due to higher Japan tax rate.
Latin America
Operating earnings were $125 million, up 2% (unchanged on a constant currency basis) year over year. Earnings improved on the back of volume growth, partially offset by higher expenses and taxes.
EMEA
Operating earnings from EMEA increased 10% (or 5% on constant currency basis) year over year to $79 million, riding on volume growth in Turkey and Western Europe as well as lowered expenses.
MetLife Holdings
Operating earnings from MetLife Holdings came in at $194 million, down 3% year over year, attributable to lower interest margin and the impact of notable adjustments recorded in the current and prior periods.
Corporate & Other
Corporate & other incurred an operating loss of $528 million, wider than the loss of $203 million in the prior-year quarter.
Earnings per Share (EPS)
MetLife’s fourth-quarter 2017 operating earnings of $1.11 per share beat the Zacks Consensus Estimate by 0.91%. However, the bottom line gained 3% year over year.
research Analyst / Anupama MukhopadhyayCopy Editor / Pramita Bose
Content Ed. / Sapna Bagaria
Lead Analyst / Sapna Bagaria
QCA / Tanuka De
No. of brokers reported/Total brokers / 9/13
Reason for Update / 4Q17 Earnings Update