MET MetLife Inc

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

The company reported second quarter operating earnings per share of $1.24, comfortably surpassing the Zacks Consensus Estimate of $1.11 per share and $1.10 per share in the year-ago quarter. Operating earnings jumped 45% year over year to $1.33 billion from $914 million in the year-ago period.

The upside was primarily due to a robust 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 Auto & Home segments, higher expenses and lower-than-expected derivative gains. During the reported quarter, MetLife’s total expenses shot up 31% year over year to $15.43 billion.

 MetLife maintains a diversified business mix and 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.

MetLife has been enhancing its group life benefits portfolio for small businesses by focusing on will preparation and estate resolution services along with other long-term needs, thereby filling up demand for such services across the market.

Moreover, the ALICO acquisition from American International Group Inc. (AIG) in November last year has become a feather in MetLife’s cap. The ALICO acquisition has increased MetLife’s investment portfolio by about 25% that expands its global investment market reach and also accelerates its long-term global growth strategy. In the first half of 2011, the international segment has posted earnings of $1.07 billion against $289 million in the year-ago period, primarily backed by ALICO.

Overall, the deal is 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.

Further, 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. Solid earnings, premiums growth from international businesses and active capital management are key positive factors which has helped the growth in ROE and book value. Going ahead, management expects to help maintain a sturdy cash flow while achieving the targeted ROE of more than 11% in 2011 and beyond.

However, 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. This has even impelled management to explore its divestment in the near future.

Going ahead, other regulatory disturbances from the SEC related to the recent ALICO acquisition are also expected to pose a challenging operating environment for MetLife.

Additionally, MetLife has significant exposure to commercial mortgage-backed securities, Alt-A residential mortgage-backed securities and subprime residential mortgage-backed securities, many of which have experienced rating downgrades from investment grade to below investment grade. Besides, the current interest rate environment is likely to continue putting pressure on the spreads. In future, these weak conditions are also expected to augment losses in the investment portfolio. The rating downgrades reflect the challenges faced by MetLife as it steers through the turbulent economic environment.

Above and beyond, MetLife continues to be pressured by a rising trend in benefits and claims that puts additional strain on the expenses and bottom line. Against this backdrop, the markets of the US and Japan continue to remain sluggish and have also been affecting the premiums growth.

Weighing all the pros and cons, the Zacks Consensus Estimate for the third quarter of 2011 is currently pegged at $1.32 per share, up 16% year-over-year. For 2011, earnings are expected to grow about 21% over 2010 to $5.18 per share, reflecting growth from ALICO.

 
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