Derivative Gains Lift MetLife - Analyst Blog

By Zacks Equity Research,

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MetLife Inc. ( MET ) reported fourth quarter operating earnings per share of $1.31, modestly ahead of both the Zacks Consensus Estimate of $1.24 and $1.18 recorded in the year-ago quarter. Operating earnings escalated 17% year over year to $1.4 billion.

During the reported quarter, operating earnings per share were adversely affected by net investment losses of 52 cents and other adjustments of 48 cents. These were partially offset by net derivative gains of 55 cents per share, tax benefit of 18 cents and income from discontinued operations of 2 cents.

Consequently, GAAP net income spiked to $1.13 billion or $1.06 per share as compared with only $51 million or 5 cents per share in the prior-year quarter.

The upside was primarily due to a robust growth in the International business segment, improved underwriting results as well as higher demand for variable annuities, net investment income and higher-than-expected derivative gains. This was partially offset by lower-than-expected performance at its U.S. business segment along with higher expenses. During the reported quarter, MetLife's total expenses ascended 19.8% year over year to $15.22 billion.

Total operating revenue for the reported quarter increased 19% year over year to $16.41  billion and also beat the Zacks Consensus Estimate of $14.6 billion. Besides, total revenue surged 32% year over year to $16.75 billion. MetLife's premiums grew 27.1% year over year to $9.17 billion, led by the ALICO acquisition. Fee revenue substantially rose 15.5% to $1.95 billion, while net investment income inched up 3.6% year over year to $4.94 billion.

Segment Details

Total operating earnings from the U.S. business improved 4% year over year to $932 million, given the favorable underwriting results in group life and non-medical health. The upside was attributable to higher earnings from Insurance and Auto & Home fields, partially offset by reduced earnings from Retirement Products and Corporate Benefit Funding (CBF). The U.S. business premiums, fees and other revenues climbed 7% year over year at $7.6 billion driven by modest premium growth in CBF coupled with higher fee revenue in Retirement Products.

Besides, operating earnings jumped 33% in Insurance Products coupled with 9% growth in Auto & Home driven by lower catastrophes. The net written premiums in Auto & Home edged up 2% year over year to $740 million. However, operating earnings witnessed a 5% dip in Retirement Products and a 21% plunge in the CBF based on lower variable investment income.

The International segment's operating earnings shot up 89% year over year to $570 million. The results reflect robust performance after the ALICO acquisition coupled with growth in Latin America, Middle East and Japan. Besides, a 16% year-over-year sales growth was witnessed in Japan while 12% growth was witnessed across all international operations. Japan contributed about 57% to the International segment's operating earnings, driven by reduced claims, higher investment income, solid underwriting and improved persistency.

Additionally, Corporate & Other operating loss was recorded at $104 million, far wider than a loss of $2 million in the prior-year quarter, based on higher expenses.

Meanwhile, the company has divested most of the business of MetLife Bank and hence, this segment has been excluded from the reported quarterly results.   

Full-Year 2011 Highlights

For full-year 2011, MetLife recorded operating net income of $5.36 billion or $5.02 per share as compared with $3.83 billion or $4.31 per share in 2010. Earnings per share also came in substantially higher than the Zacks Consensus Estimate of $4.91 per share.

During 2011, operating earnings per share were adversely affected by net investment losses of 81 cents, other adjustments of $1.54 and tax expense of 79 cents. These were partially offset by net derivative gains of $4.52 per share and income from discontinued operations of 2 cents. As a result, GAAP net income came in at $6.71 billion or $6.29 per share against $2.67 billion or $3.00 per share in the prior year.

Total operating revenue for the reported quarter jumped 27% year over year to $65.38 billion and also exceeded the Zacks Consensus Estimate of $59.7 billion. Besides, total revenue substantially surged 34.4% year over year to $70.26 billion. However, MetLife's total expenses shot up 24.6% year over year to $60.24 billion.

Financial Update

MetLife's net investment income increased 11% year over year to $4.9 billion, while net investment portfolio loss was $213 million, down from a year-ago gain of $6 million. The company's total investment portfolio also escalated to $493.55 billion at the end of 2011, up from $448.39 billion at the end of 2010, primarily due to the influx of ALICO.

Besides, derivative gains surged to $351 million in stark contrast to a loss of $1.1 billion in the year-ago quarter. The upside was driven by declines in interest rates and gains in the company's variable annuity hedging program, under which variable investment income grew to $247 million in the reported quarter from $243 million in the year-ago quarter.

As of December 30, 2011, MetLife's book value per share excluding AOCI increased 13% year over year to $49.02. Reported book value (including AOCI) per share escalated 24% to $54.59 versus $44.18 at the end of the year-ago period.

At the end of 2011, MetLife has total investments of $511.43 billion, up from $460.31 billion at 2010-end. However, cash and cash equivalents declined to $10.46 billion, while total assets increased to $799.63 billion, long-term debt reduced to $23.69 billion and total equity increased to $60.17 billion, from 2010.

Outlook for 2012


On December 5, 2012, MetLife announced its projected operating earnings growth to be about 7% year over year in 2012, which is guided in the range of $5.1-5.6 billion or $4.80-5.20 per share based on average shares outstanding of about 1.07 billion. This guidance does not assume share buybacks, which is likely to perk up earnings per share.

Management further evaluated a 5% growth in premiums, fees and other revenues, in the range of $47.3-48.6 billion, for 2012.

As ALICO has amplified the company's international presence substantially, in November 2011, MetLife also restructured its revenue streams into three business units to capitalize on geographic differences: The Americas , Asia and EMEA (Europe, Middle East, and Africa). Earlier, the company was divided into the U.S. and International geographical regions. Going ahead, management estimates revenue to grow by about 20% per year through 2015 in Brazil, Russia, India and China.

Dividend Update

On December 14, 2011, the board of MetLife paid a regular quarterly dividend of 74 cents per share to shareholders of record as on November 9, 2011.

Business Update

On January 10, 2012, MetLife announced the pack up of its forward residential mortgage business, which originated under MetLife Home Loans, which is the residential mortgage division of MetLife Bank. However, MetLife Home Loans will honor the majority of its contractual loan commitments, most of which are expected to be off the record within 3 months, thereby continuing to serve its current reverse mortgage originations.

Meanwhile, MetLife projects to incur costs of $90-100 million, scheduled for 2013. However, we expect increased compensation and benefit expenses over time, given the bulk of lay offs.

On December 27, 2011, MetLife agreed to sell its bank deposits worth $7.5 billion to GE Capital - the financial services unit of General Electric Co. ( GE ). The deal is expected to culminate by the end of the first half of 2012, subject to regulatory approvals. As of September 30, 2011, MetLife Bank deposits stood at $10.7 billion. Accordingly, the transition services agreement entered into by MetLife Bank and GE Capital include certificates of deposit and money market accounts.

On October 12, 2011, MetLife management had intimidated about its decision to explore a sale of MetLife Bank's depository business as well as its forward mortgage origination business.

Meanwhile, MetLife is also exploring the sale of the remaining custodial deposits worth $3.0 billion in the upcoming months.

Besides, MetLife is likely to furnish a fresh capital plan to the Federal Reserve (Fed) in early 2012, in order to hike dividends and recommence stock buyback, thereby deploying its excess capital efficiently. However, in October last year, the Fed had rejected the company's plan based on the size and scale of its bank operations and has been since then closely and strictly supervising MetLife. This also explains the company's rapid divestment or shut down of most of its banking operations.

Peer Take

Besides, MetLife's prime peer, American International Group Inc. ( AIG ), is expected to release its fourth quarter financial results after the market closes on February 23, 2012.

Meanwhile, on February 8, 2012, another close competitor, Prudential Financial Inc. ( PRU ) reported core operating earnings for the fourth quarter of $1.97 per share, substantially higher than the Zacks Consensus Estimate of $1.76. Results were positively impacted, primarily by a three-fold increase in International earnings, led by Japan acquisitions earlier during the year. Full year 2011 earnings of $6.41 per share surpassed the Zacks Consensus Estimate of $6.25. 

AMER INTL GRP ( AIG ): Free Stock Analysis Report
GENL ELECTRIC ( GE ): Free Stock Analysis Report
METLIFE INC ( MET ): Free Stock Analysis Report
PRUDENTIAL FINL ( PRU ): Free Stock Analysis Report
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

This article appears in: Investing , Business , Stocks
Referenced Stocks: AIG , GE , MET , PRU

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