MetLife Progresses with ALICO

MetLife Inc. (MET) reported first quarter operating earnings per share of $1.33, exceeding the Zacks Consensus Estimate of $1.26 per share and $1.04 per share in the year-ago quarter. Operating earnings increased 64% year over year to $1.42 billion from $864 million in the year-ago period.

During the reported quarter, operating earnings per share were adversely impacted by net investment losses of 9 cents, net derivative losses of 29 cents, other adjustments of 15 cents and loss from discontinued operation of 4 cents. These were partially offset by tax and other adjustments of 32 cents.

As a result, GAAP net income came in at $830 million or 78 cents per share as compared with $805 million or 97 cents per share in the prior-year quarter, on lower share count. The reported quarter includes the results of American Life Insurance Co. (ALICO) during the period from December 1, 2010 to February 28, 2011, since its fiscal year ends on November 30, 2010.

The upside was primarily due to strong growth in the International business segment, strong underwriting results as well as higher variable annuity deposits and net investment income. This was partially offset by underperformance at its banking and the U.S. segments, higher expenses and higher-than-expected derivative losses. During the reported quarter, MetLife’s total expenses shot up 21.1% year over year to $14.43 billion.

Total operating revenue for the reported quarter increased 22% year over year to $15.82 billion and also exceeded the Zacks Consensus Estimate of $14.74 billion. MetLife’s premiums grew 26.0% year over year to $8.55 billion. Net investment income surged 23.1% year over year to $5.32 billion, led by ALICO acquisition.

Segment Details

Total operating earnings from the U.S. business jumped 15% year over year to $908 million. The ascent was attributable to higher earnings from Insurance and Retirement Products and Corporate Benefit Funding (CBF).

The U.S. business premiums, fees and other revenues were modestly down year over year at $7.0 billion. A decline of 2% was witnessed in Insurance Products coupled with about 49% decline in the CBF that was offset by a 13% increase in Retirement Products and 3% surge in Auto & Home premiums. However, operating earnings for CBF increased 31% year over year to $289 million, primarily due to higher net investment income.

Operating earnings of the Auto & Home segment under MetLife’s U.S. business decreased 21% year over year to $57 million based on higher-than-expected catastrophe losses of $14 million.

The International segment’s operating earnings jumped to $567 million from $147 million in the year-ago quarter. The results reflect strong performance after the ALICO acquisition coupled with growth in Latin America and Asia-Pacific regions. Besides, 45% sales growth was witnessed in Japan while 27% growth was witnessed across all international operations.

MetLife Bank’s operating earnings were $11 million, down 79% from the year-ago quarter, primarily due to lower mortgage servicing revenue. However, Corporate & Other operating loss was recorded at $68 million, substantially lower from a loss of $127 million in the prior-year quarter on the back of higher net investment income and one-time tax benefits.

Financial Update

MetLife’s net investment income increased 14% year over year to $4.9 billion, while net investment portfolio loss came in at $29 million, up from a year-ago loss of $23 million. Besides, derivative losses climbed to $254 million in the reported quarter, based on the adverse impacts of interest rate, currency fluctuation and credit spreads.

MetLife’s total investment portfolio was recorded at $452.5 billion at the end of the reported quarter, up from $451.2 billion at 2010 end. As of March 31, 2011, MetLife’s book value per share excluding AOCI increased substantially to $44.18 compared to $42.67 as of March 31, 2010. Reported book value (including AOCI) per share climbed vigorously to $45.24 versus $41.21 at the end of year-ago period.

Guidance for 2011

Management expects that the second quarter 2011 operating earnings will be impacted by $45–$65 million based on increased claims and expenses due to the catastrophe in Japan.

On December 6, 2010, MetLife announced its projected operating earnings growth at over 38% year over year in 2011, guided in the range of $5.1–$5.5 billion or $4.75–$5.15 per share. The heightened optimism reflects the company’s major acquisition of ALICO in November 2010 for $16.2 billion.

Management evaluated a 30% growth in premiums, fees and other revenues, in the range of $45.8–$47.0 billion, in 2011. Further, strong growth momentum is also expected to contribute to the return on equity, which is estimated to be about 11% for 2011. MetLife has also increased its investment portfolio by about 25% with the inclusion of ALICO.

However, the macro risks related to the low interest-rate environment and catastrophes in Japan coupled with sluggish recovery in the US and Japan are expected to remain on the surface throughout 2011.

Amid these weak factors, the latest ALICO transaction is poised to boost MetLife fundamentally by contributing to the company’s international operating earnings including international life and international accident and health. Besides, the US corporate benefit is also expected to be a major growth contributor with improvement in Latin America. The three together constituted 46% of operating earnings in 2011.

Meanwhile, MetLife desires to enhance its investment-grade and high-yield credit investment portfolio from 35.5% to 36.75%. However, junk portfolio is expected to reach 5.0% in 2011 from the current 4.5%, while cash and short-term holdings will account for 5.75% of investments in 2011 as compared with the current 7.7% allocation. Alongside, the U.S. Treasury and agency securities are projected to decline to account for 7.5% of the portfolio against 8.3%.

Our Take

We believe that MetLife’s solid earnings growth also helps it return wealth to shareholders from time to time. Besides, the amalgamation of ALICO has immediately become accretive to earnings, although related debt cost will weigh on the bottom line for some time.

While we think MetLife should continue to benefit from its diversified business mix as well as its leading brand, losses in the investment portfolio, particularly derivative losses, are likely to impact the results in the upcoming quarters.

According to Fortune 500, based on revenues, MetLife ranked as the 2nd leading life insurer in 2010 after American International Group Inc. (AIG), which is expected to release its financial results after the market closes today.

Another prime peer Prudential Financial Inc. (PRU) reported its results after the market closed yesterday. Prudential’s fourth quarter core operating income increased 17% year over year to $1.69 per share, significantly exceeding the Zacks Consensus Estimate of $1.48 per share.

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