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MET Wary of 2013, Shelves Buyback

MET AIG GE

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Yesterday, MetLife Inc. (MET - Analyst Report) announced its projected operating earnings growth to falter in 2013 on an annual basis, which is guided in the range of $5.5–5.9 billion or $4.95–5.35 per share based on average shares outstanding of about 1.11 billion. This guidance does not assume share buybacks, which is expected to be withheld next year.

However, management raised the earnings projection for full year 2012 in the band of $5.5–5.6 billion or $5.15–5.25 per share from the prior estimation of the range of $5.14–5.57 billion or $4.80–5.20 per share based on average shares outstanding of about 1.074 billion. This indicates growth of about 19% from $4.7 billion or $4.38 per share in 2011.

Management further evaluated premiums, fees and other revenues in the range of $47.3–47.7 billion for 2012, reflecting a 5% growth over $45.4 billion recorded in 2011. Excluding accumulated other comprehensive income, book value is expected to be within $46.97–47.41 per share in 2012, increasing 0.6–1.5% from $46.69 a share in 2011.

Meanwhile, return of equity (ROE) is estimated to be around 11.0–11.1%, rising from 10.1% in 2011. In May this year, MetLife had charted out its long-term ROE growth goals of 12–14% to be achieved by 2016, driven by higher operating earnings.

Additionally, the company projects fourth-quarter 2012 operating earnings, excluding adjustments, in the range of $1.2–1.3 billion or $1.12–1.22 per share based on average shares outstanding of about 1.085 billion. This mirrors a growth ranging from negative 4% to 4% from $1.2 billion or $1.17 a share reported in the fourth quarter of 2011.

International Growth to Defy Low-Rate Environment…

As indicated earlier, MetLife continues to focus on growth through higher penetration in the rapidly growing international emerging markets. In 2011, the company’s international business generated earnings of $2.21 billion against $780 million in 2010, followed by consistent growth thus far in 2012, primarily backed by American Life Insurance Co. (ALICO), which was acquired from American International Group Inc. (AIG - Analyst Report) in November 2010.

Moreover, favorable investment spreads and insurance margins have supported the growth this year, thereby validating management’s raised guidance for 2012. The company also benefits from strong risk management by hedging against low interest rates, disciplined expense control as well as price accretion of retirement products, which has been validated by the ratings agencies from time to time.

Going forward, MetLife seeks to achieve growth through its customer-oriented business model and by reducing its product-risk and capitalizing on its global employee benefits business.Additionally, MetLife is focusing on strategically shifting its product mix toward protection products and away from more capital-intensive products, in order to generate more predictable operating earnings and cash flows, thereby improving its risk profile and free cash flow.

However, management views moderated growth in 2013 based on the inflationary pressure and an extended low interest rate scenario across economies. These factors deter higher returns from the investment of premiums. Meanwhile, the low interest rates in the US are expected to continue for next 2–3 years.

Moreover, failure to pass the capital stress test earlier this year has swallowed MetLife’s scope of deploying any capital through share buybacks or dividends in 2013. This may adversely affect the investor sentiment.

The Federal Reserve (Fed) extended the company’s deadline to submit a refurbished capital plan from June 2012 to September-end 2012 to January 5, 2013. Another rejection in the future could gravely raise the risk of rating downgrades. The ongoing regulatory challenges and risk of being acknowledged as a systemically important financial institution could put MetLife under Fed’s supervision again and also pose hindrance in the completion of the target of repurchasing shares worth about $8 billion from 2014–2016.

The company also plans to shed off its banking status as soon as possible. On Wednesday, it received an approval from the Office of the Comptroller of the Currency for its long pending deal with General Electric Co.’s (GE - Analyst Report) GE Capital Bank, which is buying MetLife’s bank deposits for about $7 billion. However, its culmination day is yet to be scheduled.

Consequently, the shares of MetLife closed at $32.83 on Thursday, down 2.3%, at the New York Stock Exchange.

Estimate Trend Revision

Over the last 30 days, four of the 17 analysts covering the stock have raised their estimates for the fourth quarter of 2012 and full year 2012, while no upward revision was witnessed. Currently, the Zacks Consensus Estimate for the fourth quarter 2012 is operating earnings of $1.24 per share, which would be down by 5.7% from the year-ago quarter.

The Zacks Consensus Estimates for full-year 2012 are currently pegged at $5.26 per share (up 4.8% over 2011), at upper-end of the latest guidance. For 2013, earnings are pegged at $5.49 per share (4.4% over 2012), which is at the lower-end of the guidance. MetLife retains a Zacks #3 Rank, which translates into a short-term Hold rating and a long-term Neutral recommendation.

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