ALICO to Earn for MetLife in 2011

Yesterday, MetLife Inc. (MET - Analyst Report) announced its projected operating earnings growth to be more than 38% year over year in 2011, which is guided in the range of $5.1–$5.5 billion or $4.75–$5.15 per share. The raised optimism reflects the company’s major acquisition of American Life Insurance Co. (ALICO) from American International Group Inc. (AIG - Analyst Report) last month for $16.2 billion.

The addition of the global life insurer, ALICO, is expected to diversify the company’s income sources while also mitigating the risks arising from other core operations of MetLife in the US, primarily the auto and home segment. This is reflected by the management’s evaluation of a 30% growth in premiums, fees and other revenues, in the range of $45.8–$47.0 billion, in 2011.

Further, this 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 a deflation scenario in Japan coupled with sluggish recovery in the US and Japan is expected to remain on the surface throughout 2011.

Amid these weak factors, MetLife believes that 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 major growth contributor with improvement in Latin America, the three together constituting 46% of operating earnings in 2011.

Besides, MetLife projects fourth quarter 2010 net income of $170–$570 million or 17–56 cents per share as compared with $289 million or 35 cents a share in the year-ago period. Excluding investment gains and losses, operating earnings is anticipated in the range of $1.1–$1.2 billion or $1.04–$1.14 per share, increasing about 39% from $793 million or 96 cents a share in the fourth quarter of 2009.

For full year 2010, MetLife guided net income of $2.8–$3.2 billion or $3.13–$3.57 per share, while operating earnings are expected to be $3.8–$3.9 billion. Premiums, fees and other revenues shall be up 5% year over year, in the range of $35.6–$36.0 billion.

Investment Portfolio Update

Concurrently, MetLife also announced yesterday the purchase of credit-default swaps (CDS) worth $200 million, in order to protect itself against declines in Portugal’s sovereign debt. The company had hedged in these bonds that were accumulated in Portugal by ALICO at the time of the acquisition. MetLife’s debt exposure amounts to about $379 million in Portugal and $735 million in Greece.

Meanwhile, MetLife is also pursuing 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 next year as compared with the current 7.7% allocation. Alongside, the US Treasury and agency securities will decline to account for 7.5% of the portfolio against 8.3%.

Estimate Trend Revision

Over the last 30 days, one of the 18 analysts covering the stock has raised its estimates for the fourth quarter of 2010, while 2 downward revisions have been witnessed. Currently, the Zacks Consensus Estimate for third quarter is operating earnings of $1.06 per share, which would be up by 10.3% from the year-ago quarter.

The higher number of downward estimate revisions for the fourth quarter indicates a likelihood of downward pressure on the performance of the stock in the near term.

With respect to earnings surprises, the stock has been almost steady over the last four quarters, with three positive surprises. The average remained positive at 6.07%. This implies that MetLife has surpassed the Zacks Consensus Estimate by 6.07% over that period.

Earnings Recap

MetLife reported third quarter operating earnings of $878 million or 99 cents per share, well ahead of $718 million or 87 cents per share in the year-ago quarter. However, results missed the Zacks Consensus Estimate of $1.03 per share. Reported net income was $286 million or 32 cents per share compared with a net loss of $650 million or 79 cents per share in the prior-year quarter.

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

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