MetLife's ( MET ) first quarter results saw net income increase 36% over the prior year, but failed to inspire confidence as operating earnings fell 4% from the prior year. Operating earnings from the Americas region were up 3%, but the income from the Asia region dropped 2% on a reported basis due to FX headwinds, despite an 8% increase on a constant currency basis. Earnings were also affected by a $57 million after-tax expense related to the recent settlement with the New York Department of Financial Services. The net income also included an after-tax loss of $343 million related to the sale of the U.K. pension risk transfer business to Rothesay Life Ltd.
Our $49 price estimate for MetLife's stock is in line with the current market price. We use a dividend discount methodology ( DDM ) to estimate the value of the company, estimating the total income that can be returned to shareholders and discounting this value back to the present. MetLife's capital distribution capabilities might be restricted by its potential as a non-bank Systemically Important Financial Institution by the Financial Stability Oversight Council. The enhanced standards that will apply to MetLife should it be designated as a SIFI have not yet been announced by the Fed.
Margins Decline In The U.S.
MetLife is the largest life insurance company in the U.S., with a market share of over 10%, ahead of AFLAC Group and Prudential Financial ( PRU ). The company offers life insurance products and annuities to individuals through its retail division; and group life and dental contracts to corporate employers through its group voluntary & worksite benefits division.
The retail division accounted for nearly 80% of the first quarter operating income from U.S. operations. Although strong fixed annuity sales led to a 9% increase in premiums, fees and other income, operating earnings fell 2%. This was primarily because of adverse mortality results as the mortality ratio, which shows direct claims experienced as a percentage of the expected claims, increased from 91.3% in the first quarter of 2013 to 93.6%, outside the target of 85% to 90%. The company also introduced a new metric to gauge its underwriting performance, the interest adjusted benefit ratio. This ratio measures claims net of reinsurance and changes in future policyholder benefits net of interest relative to premiums. The interest adjusted benefit ratio increased from 52.1% in 2012 to 56.9%. This was outside the company's target of 50% to 55%.
Despite the poor underwriting performance, management reiterated that the company's risk profile remains favorable and that it is shifting its sales mix away from market-sensitive products such as variable annuities to more balanced protection products. Variable annuity sales were down 54% this quarter, as MetLife continued to cut down on the offering. The company was the leading seller of variable annuities in 2011 but has dropped down to sixth place, behind AIG ( AIG ), which is making a sales push. We expect the company's loss ratio to remain within the historical average range. You can modify the interactive chart below to gauge the effect the company's efforts to improve underwriting performance might have on our price estimate.
Acquisition Helps Latin America Performance
Latin America earnings were helped by the $2 billion acquisition of Chilean private pension-fund administrator ProVida from BBVA. Operating earnings were up 48% on a constant currency basis and 28% on a reported basis, with premiums and fees increasing 9% over the previous year on a reported basis and 22% on a constant currency basis. The company also reported organic growth; excluding the ProVida acquisition, sales were up 15% while premiums and fees increased 12% on a constant currency basis. Latin America accounted for 10% of the company's operating earnings. MetLife's share of the Latin American market increased from 3.6% in 2009 to 4.4% in 2013, and we expect it to maintain this momentum through the coming years.
Currency Fluctuations Affect Earnings From Asia
MetLife's Asian operations accounted for nearly a quarter of the company's operating income in the first quarter. The division's operating income was down 2% as FX headwinds affected earnings. Premiums and fees were down 6% on a reported basis but increased 6% on a constant currency basis as currencies, particularly the Japanese Yen, weakened against the U.S. dollar.
Japan is the fulcrum of MetLife's Asia-Pacific operations. The company has a market share of around 5% in the Japanese insurance market, with around 7 million policies in force and over $75 billion in assets. MetLife offers Yen whole life products such as low cash value whole life, Yen interest simplified whole life and simplified issue whole life, as well as foreign currency whole life products. Bancassurance is the main distribution model for the company, accounting for 33% of the sales. MetLife has around 100 banking partners in the country with over 42 tier 1 regional banks and five mega banks. First quarter Japan sales were unchanged from the previous year as the company's pricing actions led to a decline in Yen life sales even though retirement product sales were strong.
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