MetLife Reinstated at Neutral - Analyst Blog

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We have reiterated our Neutral recommendation on MetLife Inc. ( MET ) based on its consistent progress from the ALICO acquisition, partially offset by higher expenses, consistent low rate environment and restricted growth vision on MetLife Bank.

MetLife reported third quarter operating earnings per share of $1.11, triple pennies ahead of both the Zacks Consensus Estimate and the year-ago quarter. Operating earnings also accelerated 23% year over year to $1.18 billion from $958 million in the year-ago period.

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 underperformance at its Banking and the U.S. business segments along with higher expenses. During the reported quarter, MetLife's total expenses shot up 26.8% year over year to $15.15 billion.

The declining trend is also reflected from the continued weakness in the company's auto and home segment and MetLife Bank. Underperformance in operations and stringent regulations bank holding companies attached to MetLife Bank are further weakening the competitive strength of MetLife.

Previously, the company had also faced a rejection on its capital plan from the Fed based on the size and scale of its bank operations. These factors have finally impelled management to explore its divestment in the near future.

Current interest rate environment will continue to put pressure on the spreads and MetLife's risk-adjusted capitalization, which stands lower for its current rating level. Although losses in net investment portfolio have moderated from the peak levels during 2008 and the early part of 2009, these are expected to persistently trim profits over the near term until the markets gain buoyancy.

Going ahead, earnings will also likely be under pressure as the low interest rate environment continues to weigh on the company's interest sensitive product margins, leading to contraction in spreads.Moreover, we believe that the radical and extraordinary upside in 2011, primarily from ALICO, will likely create difficult comps in 2012.

On the flip side, MetLife maintains a diversified business mix and is one of the strongest brands in the U.S. The company's operating results are expected to benefit from growth in almost all business lines and a higher asset base in the upcoming years.

Moreover, MetLife consistently re-aligns its business portfolio to cater to market demands. Besides, the company's variable annuity business has been witnessing strong performance, whose long-term growth outlook for VA products remains positive, led by increased demand for guaranteed lifetime income.

Besides, the ALICO acquisition from its arch-rival - American International Group Inc. ( AIG ) in November last year has become a feather in MetLife's cap. MetLife's consistent robust growth from the ALICO acquisition amid the low rate interest environment is also reflected by the affirmation of ratings by A.M. Best, who upgraded its outlook to stable from negative in November 2011.

The influx of ALICO has not only inflated the company's investment portfolio drastically but has also been projected to be accretive to earnings by 40-45 cents per share and is likely to have a positive effect on return on equity (ROE) by 100 basis points in 2011.

Meanwhile, MetLife has been successful in maintaining a strong operating leverage, which is further reflected in management's 7% growth guidance for 2012. Moreover, MetLife has a strong capital position, ample liquidity and leading market positions in its core group and individual insurance businesses, where its revenue continues to be healthy.Besides, MetLife holds a diminishing risk-profile with improved financial leverage and interest coverage ratios. Going ahead, management's projected book value growth of 28% over 2010, within $56.15-57.25 per share range, in 2011 further injects optimism on the fundamentals.

Above and beyond, MetLife is also gearing up to propose afresh capital plan to the Federal Reserve (Fed) in January 2012, in order to hike dividends and recommence stock buyback, thereby deploying its excess capital efficiently. A final decision is expected by the end of the first quarter of 2012.

Weighing all the pros and cons, the Zacks Consensus Estimate for the fourth quarter of 2011 is currently pegged at $1.23 per share, up 8% year-over-year. Of the 16 firms covering the stock, nine have revised their estimates downward in the last 30 days, while one upward revision was witnessed. For 2011, earnings are expected to grow about 12% over 2010 to $4.90 per share, reflecting growth from ALICO.

As a result of the growth moderation in 2012, the Zacks Rank currently stands at #3, implying a short-term Hold and long-term Neutral stance.

AMER INTL GRP ( AIG ): Free Stock Analysis Report

METLIFE INC ( MET ): 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.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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